Wednesday, April 18, 2012

Crowdfunding: Fleecing the American Masses

Griffin, Zachary, "Crowdfunding: Fleecing the American Masses" (March 14, 2012). Case Western Reserve Journal of Law, Technology & the Internet, Forthcoming.

From abstract: “As our economy continues to sputter along like a beat-up station wagon, politicians in Washington are searching for new ways to boost its prospects. Many, including President Barack Obama, are looking to spur small business growth as a solution to our economic woes. However, such growth is stymied by the lack of capital available to small businesses. As Representative McHenry stated, “lending to job creators and entrepreneurs remains dismal, [and] we must find new and modern means for capital formation to ignite our sputtering economy.” Such “ignition” will come from crowdfunding, or at least politicians seem to think so.

Crowdfunding is a means of capital formation that connects entrepreneurs with investors over the Internet. Entrepreneurs can post their business plans on crowdfunding websites, and anybody connected to the Internet can contribute, or invest, in these companies. However, there is catch; investors are limited in the types of returns they can receive from their capital contributions. Currently, investors cannot receive any form of security, because “crowdfunding does not mesh with federal securities regulation[s].” The Securities Act of 1933 makes it illegal to offer or sell any security unless the issuer has complied with the registration requirements under section 5 of the Act or has met a registration exemption. “Entrepreneurs seeking debt or equity financing through crowdfunding will often be selling [unregistered] securities,” as compliance with the registration process is too expensive for most entrepreneurs and the Act’s exemptions do not fit with the crowdfunding model. As such, there is a tremendous push in Washington to create a new exemption for securities issued through crowdfunding.” Read more